Taxation of directors’ fees can be a challenging area to navigate.
For companies, there can be different withholding tax obligations depending upon the way in which a director is delivering their services and their country of residence.
Given their governance roles, there will be an expectation that directors will be fully compliant with their own tax affairs. That requires understanding the different tax rules that can apply when undertaking directorships and also Inland Revenue’s expectations in this space.
A recent development for directors to be aware of is Inland Revenue’s release of guidance on the GST treatment of directors’ fees. The guidance covers directorship of companies as well as board memberships in public entities (such as central and local Government agencies).
In a nutshell, Inland Revenue’s view is that a person who provides only directorship or board membership services is not eligible to be registered for GST as these activities cannot, in their own right, be a taxable activity for GST purposes. This will therefore impact most professional directors.
While Inland Revenue has stated that its position is not a change of view, this is the first time that it has publicly stated that professional directors and board members may not be eligible to GST register. So, this may come as a surprise to some professional directors, who may not be aware of how the GST rules are intended to apply.
Inland Revenue has also released an Operational Statement to provide guidance on correcting GST positions previously taken. The good news is that it confirms that directors who have incorrectly registered for GST will not have to retrospectively de-register. However, they will be required to de-register by 30 June 2023. And, on deregistration, they may need to return GST on the market value of any goods and services that were acquired for use in providing directorship services that are still in use.
And to illustrate the complexity in this area, there are some exceptions to the above. For example, de-registration will not be required if a person also carries on another activity, for which they are required to be GST registered (such as a business consultant or an accountant or lawyer who is registered for GST and is asked to serve on the board of directors of a client company). Different outcomes may also apply if a person accepts a directorship in their capacity as an employee of a third party (in which case their employer may be required to return GST) or as a partner of a partnership (the partnership may be required to return GST).
It is therefore important to ensure that the specific circumstances are well understood by all parties and the contractual arrangements clearly documented.
More generally, recognising the complexities in this space, it is timely to consider whether tax compliance obligations are being correctly managed both for directors and the organisations engaging their services.
If you would like to discuss these GST developments, or the tax issues in this area more generally and how they might impact you or your organisation, please get in touch with us today.
